8/15/2007 @ 3:38PM

The Rebirth Of The Small Video-Rental Shop

Big video-rental chains have been kicking small shops in the teeth for years–which makes Christine Kim’s feat all the more impressive. Last month Kim celebrated the first-year anniversary of her store, Get Reel Video, in Brooklyn, N.Y. Better yet, she is already in the black.

“We’re more of an art-house store,” says Kim. “We carry ‘indie’ films, documentaries and foreign films–movies you don’t find in Blockbuster or the other independent stores around here.”

Targeting niches was one strategy that helped small proprietors like Kim survive in a world increasingly dominated by big chains like
Blockbuster
, Hollywood Video and
Movie Gallery
. Starting in the late 1980s, the chains marched on new markets by offering a broader selection of videos and, later, by drafting revenue-sharing agreements with the movie studios, which allowed the chains to carry many copies of new releases for a small upfront fee.

Now the big chains are getting kicked around, thanks to video-on-demand technology, online-delivery services like
Netflix
and “sell-through” pricing straight to consumers. Today a newly released DVD goes for about $16 at
Wal-Mart
and
Best Buy
, three times more than a typical rental fee at Blockbuster. For older movies, that spread drops to twice the rental fee–attractive enough for some consumers to buy the movie outright rather than have to return it in seven days.

Result: Blockbuster and Movie Gallery (which now owns Hollywood Video) together have closed nearly 800 stores out of 10,000 over the last year and a half. Blockbuster’s stock price is off 80% in the last five years, while the S&P 500 index rose 53%. To stop the bleeding, Blockbuster has been beefing up its online services to compete with Netflix; meanwhile, Movie Gallery is expected to close more stores in the next year and is expected to file for bankruptcy.

Those vacancies translate into juicy revenue potential for the roughly 12,000 resilient small survivors. “We’ve seen some of the more aggressive independents looking to expand their businesses,” says Marty Graham, president of the pay-per-transaction division at Rentrak, which brokers revenue-sharing deals for independent video stores. “A minority are opening additional stores as the major chains pull out of a particular market.”

More new players like Kim are mustering the courage to set up shop. “In the past few years, we’ve been getting calls from people interested in opening their own stores,” says Carrie Dieterich, vice president of marketing and industry relations at the Electronic Merchants Association, the trade association for the home entertainment industry. “We didn’t get those calls a few years ago.”

Daniel Wu, who owns a store several miles from Kim’s shop in Brooklyn, saw his business spike when a nearby Blockbuster closed. Now he’s considering a second store in Brooklyn. “I don’t mind co-existing with Netflix or Blockbuster,” says Wu. “People come here for an impulse buy and don’t want to wait two to three days for a movie through Netflix.”

Slinging videos is no way to print money, to be sure, but the hardiest competitors offer plenty of valuable lessons for just about any entrepreneur:

Carve out a niche. If you don’t have the muscle to go head to head in a given product line, try another. While the big chains generate roughly 85% of their revenues from new releases, Nolan Anaya, owner of Amherst, Mass.-based Captain Video, aims for more like 50%; the other half comes from older films and foreign titles. Anaya claims his profits ticked up a few percentage points last year, on sales of $300,000.

Customer service matters. Wu, a movie buff, says he can take a chance on stocking unusual titles because his customers value his recommendations. Take Junebug, a 2005 comedy that wasn’t widely released. “I saw it in theaters and I went a little nuts and bought 10 copies, the kind of volume I’d get for a big title,” says Wu. “I started recommending it, and it’s become our No. 1 renter of all time. We’ve developed a relationship with our customers that if we recommend something, many of them will try it out no questions asked.” Big chains typically don’t cultivate those sorts of relationships with customers.

Offer complementary products. To boost sales, some small retailers have branched into pizza, phone retailing and even fake tanning. “So many people put blinders on and think of themselves as a video rental store,” says Ken Dorrance, owner of Alameda, Calif.-based Video Station, which also peddles pizza and, starting this year, cellphones.

Craft flexible payment schemes. When Blockbuster did away with late fees two years ago, Alan Milligan, owner of Memphis-based Marquee Movies, responded by letting his customers prepay for rentals and rack up points, similar to a credit card rewards program. “We had to become creative,” he says. “We’re all learning how to react to the changing market.” The free popcorn doesn’t hurt either.